Question for the Money Doctors

Question submitted on Mar 1, 2013.

Question

I am divorced, and my ex got the house, as well as the first and second mortgage in the divorce decree (with a hold harmless clause). As my ex was not paying, the second mortgage company pursued me for payment. I reached a settlement with them for about 1/3 of the total loan amount. I understand they will submit a 1099 for the forgiven loan amount. Am I responsible for taxes on the forgiven loan portion?

Answer

There are various specific aspects that will determine if you are responsible for taxes on the forgiven loan portion. First, your state may look at things differently from the IRS. You may owe taxes to both, one or neither. It will depend on factors that include where you lived, the type of loan (recourse vs. non-recourse), state law and if you were considered insolvent. So, I recommend that you work with a CPA who understands your specific circumstances. The Mortgage Forgiveness Debt Relief Act was extended through 2013--hopefully to your benefit.